J.C. Penney should take a few lessons from Pier 1 Imports

Great comebacks happen in retail, and J.C. Penney fans don’t have to look far for inspiration.

In Fort Worth, Pier 1 Imports was on the verge of bankruptcy four years ago, after management bet on big furniture and the housing boom went bust. Same-store sales declined for 16 consecutive quarters, losses piled up, and the stock price fell to a dime.

With Wal-Mart and Target adding candles and trinkets, some doubted that the specialty retailer would survive. Instead, Pier 1’s turnaround has become legendary, and its market value has soared from $10 million in 2009 to $2.4 billion today.

Pier 1 recruited a new CEO, who focused on its design roots and invested in people. He rebuilt the “treasure hunt” feel of the stores, stocking them with unique, inexpensive items. That reclaimed Pier 1’s identity and sparked a reconnection with its most loyal customers.

The company also worked on the balance sheet. It sold its new headquarters high-rise for $100 million and leased back seven floors. It closed a few hundred stores and bought its own debt at a discount.

Last week, Pier 1 reported its 14th consecutive quarter of growth in same-store sales. Operating income increased 29 percent. Dividends and stock buybacks have returned. When CEO Alex Smith was asked about plans for more hiring, he jumped at the chance to reinforce his favorite theme.

“You won’t be surprised to hear me say that the biggest investment is going to be our merchandising organization,” Smith told analysts.

Pier 1 has more than 30 buyers, the design decision-makers who scour the world for the 6,000-odd items that are the company’s lifeblood. When Smith joined in 2007, Pier 1 had 11 buyers. He beefed up the buying staff even while slashing overhead because Pier 1’s future depended on it.

At the same time, he invested in the planning and allocation departments, so buyers could focus on creating and sourcing products. He didn’t want them distracted by the details of logistics. That principle continues today: With online sales expanding, Pier 1 is hiring more managers, along with buyers, to help track it all.

To “keep the same quality of decision-making and the same focus on great product, we need to add in more folks,” Smith said.

Plano-based Penney might want to go to school on that idea. Former CEO Ron Johnson, ousted last week, dismantled much of Penney’s infrastructure as part of his reinvention plan. Johnson ended the chain’s constant coupons and discounts because he believed they devalued the brand.

He also chucked much of the behind-the-scenes work (planning and allocating) that went into those campaigns; he wanted the savings to pay for renovations, including adding boutique shops. Under Johnson, Penney scaled back in-house design, too, in favor of more brand names.

Differences, too

There are limits in comparing Penney and Pier 1. While each retailer has close to 1,100 locations, Penney’s large department stores have 13 times the total square feet. Even after a 25 percent decline in sales last year, Penney’s $13 billion in annual revenue dwarfs the $1.7 billion at Pier 1. And Penney has almost 100,000 more employees, including part-timers.

Unlike Pier 1 in early 2009, Penney isn’t close to a penny stock, either. Despite losing more than half its value in the last year, Penney’s shares closed at $14.39 on Monday, with a market cap of $3.2 billion. While issues remain — the cash burn, the uncertainty over how much of Johnson’s vision should continue — Penney has strong assets and a reputation worth reclaiming.

Still, there’s one lesson from Pier 1 that any retailer could embrace, said analyst John Marrin of Jefferies & Co. He said Pier 1 takes a “crawl, walk, run” approach to new initiatives, from reformatting stores to rolling out e-commerce to expanding product categories. That allows Pier 1 to make course corrections along the way.

“As a result, I don’t think we’re ever going to see Pier 1 make any catastrophic mistakes in strategy,” Marrin wrote in an email.

Marrin, who has a buy rating on Pier 1, doesn’t cover Penney and said he hasn’t followed it closely enough to make comparisons. But former Penney CEO Allen Questrom began criticizing Johnson last summer for not testing his concepts before adopting them companywide.

With virtually all of its merchandise created or sourced by its staff, it offers shoppers a unique selection. Smith has also limited buyers to no more than 5 percent of purchases to reduce the impact of a single mistake.

The result is “more wins, fewer losses, and less risk taking,” Marrin wrote.

Because the recovery was shaky, improvements weren’t apparent for a while. In 2010, same-store sales finally turned positive, and the momentum has grown. Last year, the company unveiled a three-year growth plan, including an annual goal of $200 in sales per square foot. Pier 1 hit $198 in the 12 months ended March 2.

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About Mitchell Schnurman

Mitchell Schnurman has been writing about business news in North Texas for more than 25 years and has been a columnist since 2001. He joined The Dallas Morning News in 2012 after working at the Fort Worth Star-Telegram and Dallas Times Herald. He championed the lifting of the Wright Amendment, supported the American Airlines-US Airways merger and often weighs in on tax breaks for developers. Seven times, he’s been named one of the country’s “Best in Business” columnists by the Society of American Business Editors and Writers.